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Personal Finance Q & A

Rollover Will Keep 401(k)Tax-Free

Pay credit-card debt with life insurance policy, not inherited retirement plan

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Q My husband died and left about $50,000 in life insurance and $30,000 in a 401(k). I am 38 years old, with a three-year-old daughter. I plan to set aside the life insurance for my daughter's day-care expenses. I have not decided what to do with the 401(k). I have one of my own through my employer. We did rack up some large credit-card bills, which I might pay off with that money. What do you think?

- Name withheld

A "Don't use the 401(k) money to pay off the credit-card debt," says Tim Shmidl, a certified financial planner in Overland Park, Kan.

Instead, he recommends that you roll the 401(k) money directly into an individual retirement account, thus continuing to shelter your late-husband's account from taxes. As for the $50,000 life insurance, Mr. Shmidl suggests setting aside $15,000 in a money-market mutual fund for the day care, using both principal and interest as needed to pay that expense monthly. "The $15,000 should last around three years." By then, your daughter will be in school.

Shmidl would put the extra $35,000 into "moderately aggressive investments," such as balanced and/or growth mutual funds. "You could also use part of that money to pay off your credit-card debts," he says, or put some money into a college fund for your daughter.

Q Am I subject to capital-gains taxes when I redeem mutual-fund shares?

- A.R., Blacksburg, Va.

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A If the holdings are not tax-sheltered in an account such as an IRA or 401(k), you may owe taxes on the gains. The sale must at least be reported on your tax form. Whether you will actually be taxed depends on factors such as whether any capital losses offset the gain. For assistance, call the Internal Revenue Service at 800-829-1040. Ask for the capital-gains department. You can leave a detailed message and an IRS expert will call back with an answer.

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Guy Halverson

The Christian Science Monitor

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